42 These are enumerated in Section 34 of the NIRC.
(1) Expenses
Business expenses deductible from gross
income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income.
Requisites for deductibility of business expenses.—
(a) Ordinary AND necessary;
(b) Paid or incurred during the taxable year; (c) Others: (not in the SC syllabus)
(1) Paid or incurred in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession;
(2) Substantiated by adequate proof – documented by official receipts or adequate records, which reflect the amount of expense deducted and the connection or relation of the expense to the business/trade of the taxpayer); (3) Legitimately paid (not a BRIBE, kickback,
or otherwise contrary to law, morals, public policy);
(4) If subject to withholding tax, the tax required to be withheld on the expense paid or payable is shown to have been properly withheld and remitted to the BIR on time;
(5) Amount must be reasonable.
(2) Interest
Requisites for deductibility.—
(1) There is an indebtedness.
(2) The indebtedness is that of the taxpayer (3) The indebtedness is connected with the
taxpayer‘s trade, profession, or business.
(4) The interest must be legally due.
(5) The interest must be stipulated in writing. (6) The taxpayer is LIABLE to pay interest on
the indebtedness.
(7) The indebtedness must have been paid or accrued during the taxable year.
(8) The interest payment arrangement must not be between related taxpayers
(9) The interest must not be incurred to finance petroleum operations.
(10) In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure,
Limitation: The taxpayer's allowable deduction
for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax (see chapter on taxation
of passive income for interest income); effective
January 1, 2009.
Non-deductible interest expense.—
(a) Interest paid in advance by the taxpayer who reports income on cash basis shall only be allowed as deduction in the year the
indebtedness is paid.
(b) If the indebtedness is payable in periodic amortizations, only the amount of interest
which corresponds to the amount of the principal amortized or paid during the year
shall be allowed as deduction in such taxable year.
(c) Interest payments made between related taxpayers.
(d) Interest on indebtedness incurred to finance petroleum exploration.
Related Taxpayers
(a) Between members of the family, i.e. brothers and sisters (whether by the whole or half- blood), spouse, ancestor, and lineal descendants; or
(b) Except in case of distributions in liquidation, between an individual and a corporation,
43 where the individual owns directly or indirectly more than 50% of the outstanding stock of the corporation (c) Except in the case of distributions in
liquidation, between two corporations where:
(1) Either one is a personal holding company of a foreign personal holding company with respect to the taxable year preceding the date of the sale of exchange; and
(2) More than 50% of the outstanding stock of each is owned, directly or indirectly, by or for the same individual; or
(d) Between parties to a trust- (1) Grantor and Fiduciary; or
(2) Fiduciary of a trust and fiduciary of
another trust if the same person is a
grantor with respect to each trust; or (3) Fiduciary and Beneficiary
Interest subject to special rules.— 1. Interest paid in advance
(a) No deduction shall be allowed if within the taxable year an individual taxpayer reporting income on cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise. (b) But the deduction shall be allowed in the
year the indebtedness is paid
2. Interest periodically amortized - If the
indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year
3. Interest expense incurred to acquire property for use in trade/business/profession - At the
option of the taxpayer, interest expense on a capital expenditure may be allowed as: (1) A deduction in full in the year when
incurred;
(2) A capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure.
Reduction of interest expense/interest arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal
to 33% of the interest income subjected to final tax; effective January 1, 2009. (RA 9337)
(3) Taxes
Taxes Proper: Refers to national and local
taxes;
Requisites for deductibility.—
Such tax must be:
(a) Paid or incurred within the taxable year; (b) Paid or incurred in connection with the
taxpayer‘s trade, profession or business; (c) Imposed directly on the taxpayer.
(d) Not specifically excluded by law from being deducted from the taxpayer‘s gross income.
Non-deductible taxes.—
(1) Philippine income tax, except Fringe Benefit Taxes;
(2) Income tax imposed by authority of any foreign country, if taxpayer avails of the Foreign Tax Credit (FTC)
(a) Exception to exception: When the taxpayer does NOT signify his desire to avail of the tax credit for taxes of foreign countries, the amount may be allowed as
a deduction from gross income of citizens
and domestic corporations subject to the limitations set forth by law.
(3) Estate and donor‘s taxes
(4) Percentage tax on stock transaction; (5) Taxes assessed against local benefits of a
kind tending to increase the value of the property assessed (Special Assessments) (6) Value Added Tax
(7) Fines and penalties (8) Final taxes
44 (10) Import duties
(11) Business taxes (12) Occupation taxes
(13) Privilege and license taxes (14) Excise taxes
(15) Documentary stamp taxes (16) Automobile registration fees (17) Real property taxes
(18) Electric energy consumption tax under BP 36
Special Rules:
1. Treatments of surcharges/interests/fines for delinquency.— The amount of deductible
taxes is limited to the basic tax and shall not include the amount for any surcharge or penalty on delinquent taxes. However, interest on delinquent taxes, although not deductible as tax, can be deducted as interest expense at its full amount. (CIR v
Palanca, 18 SCRA 496).
2. Treatment of special assessment.—Special
assessments and other taxes assessed against local benefits of a kind tending to increase the value of the property assessed are non-deductible from gross income. 3. Tax credit - amount allowed by law to reduce
the Philippine income tax due, subject to limitations, on account of taxes paid or
accrued to a foreign country
The following may claim tax credits:
(1) Resident citizens
(2) Domestic corporations, which include all partnerships except general professional partnerships
(3) Members of general professional partnerships
(4) Beneficiaries of estates or trusts
The following may NOT claim tax credits: (1) Non-resident citizens
(2) Aliens, whether resident or non-resident
(3) Foreign corporations, whether resident on
non-resident
Limitations on Tax Credit.—
(1) [Per Country Limit]The amount of tax credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and
(2) [Worldwide Limit]The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable bears to his entire taxable income for the same taxable year.
Formula: Limit #1 Taxable Income Per Foreign
Country x Income Tax Phil. =
Limit on amount of tax credit (Per Country Limit) Worldwide Taxable Income Limit #2 Taxable Income For all Foreign Countries x Phil. Income Tax = Limit on amount of tax credit (World Wide Limit) Worldwide Taxable Income
Note: Computation of FTC: Limit #2 applies where taxes are paid to two or more foreign countries. Allowable tax credit is the lower between the tax credit computed under Limit #1 and that computed under Limit#2.
FTC Limitations – lowest of the 3:
(1) Actual FTC
45 (3) For taxes paid to 2 or more foreign countries
(4) Losses
Requisites for deductibility.—
(1) Loss must be that of the taxpayer (e.g., losses of the parent corp. cannot be deducted by its subsidiary);
(2) Actually sustained and charged off within the taxable year;
(3) Incurred in trade, business or profession; (4) Of property connected with the trade,
business, or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from robbery, theft, or embezzlement;
(5) Sustained in a closed and completed transaction;
(6) Not compensated for by insurance or other form of indemnity;
(7) Not claimed as a deduction for estate tax purposes;
(8) In case of casualty loss, filing of notice of loss with the BIR within 45 days from the
date of the event that gave rise to the
casualty; and
(9) The taxpayer must prove the elements of the loss claimed, such as the actual nature and occurrence of the event and amount of the loss.
No loss is recognized in the following.—
(1) Merger, consolidation, or control securities (where no gains are recognized either); (2) Exchanges not solely in kind;
(3) Related taxpayers (see above – (c) Interest
expense incurred to acquire property for use in trade/business/profession)
(4) Wash sales; (5) Illegal transactions
Other types of losses.—
a. Capital losses - Incurred in the sale or
exchange of capital assets (allowable only to the extent of capital gains,
except for banks and trust companies under conditions in Sec. 39 of NIRC where loss from such sale is not subject to the foregoing limitation);
b. Securities becoming worthless - Loss in
shrinkage in value of stock through fluctuation in the market is not deductible from gross income.
Exception: If the stock of the corporation
becomes worthless, the cost or other basis may be deducted by its owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts.
c. Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock
or securities where substantially identical securities (substantially the same as those disposed of) are acquired or purchased (or there was an option to acquire, and the acquisition or option should be by purchase or exchange upon which gain or loss is recognized under the income tax law) within a 61-day period, beginning 30 days before the sale and ending 30 days after the sale
General rule: Not deductible from gross income Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.
d. Wagering losses - Losses from
wagering (gambling) are deductible only to the extent of gains from such transactions. A wager is made when the outcome depends upon CHANCE.
e. NOLCO (Net Operating Loss Carry Over)
46 (1) The taxpayer was not exempt from income
tax the year the loss was incurred;
(2) There has been no substantial change in the ownership of the business or enterprise wherein:
(a) AT LEAST 75% of nominal value of outstanding issued shares is held by or on behalf of the same persons; or
(b) AT LEAST 75% of the paid up capital of the corporation is held by or on behalf of the same persons.
Taxpayers Entitled to NOLCO
(1) Individuals engaged in trade or business or in the exercise of his profession (including estates and trusts);
Note:An individual who avails of 40% OSD
shall not simultaneously claim deduction of NOLCO. However, the three-year reglementary period shall continue to run during such period notwithstanding the fact that the aforesaid taxpayer availed of OSD during the said period.
(2) Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) or under special laws (e.g., PEZA-registered companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year with Minimum Corporate
Income Tax cannot enjoy the benefit of NOLCO. However, the three-year period for the expiry of he NOLCO is not interrupted by the fact that the corporation is subject to MCIT during such three-year period.
Other Losses:
(1) Abandonment losses in petroleum operation and producing well.
(2) Losses due to voluntary removal of building incident to renewal or replacements are
deductible from gross income.
(3) Loss of useful value of capital assets due to charges in business conditions is deductible
only to the extent of actual loss sustained
(after adjustment for improvement, depreciation and salvage value)
(4) Losses from sales or exchanges of property
between related taxpayers are not recognized, but the gains are taxable. (5) Losses of farmers incurred in the operation
of farm business are deductible.